Falling Rate of Profit

Competition results in more machinery being employed relative to labour. This is an increase in the organic composition of capital.

Marx described the tendency for the rate of profit to fall (due to an increase in the organic composition of capital) as the most important law of political economy. That capital accumulation itself undermines the capitalist system.

The importance of the distinction between c & v – only labour produces SV

R = S/(C+(V/T))
R=annual profit rate, S=mass of surplus value produced annually, C=total constant capital in existence, V=total variable capital, T=turnover of V in a year
Since C will rise relative to V, the rate of profit will decline, all else remaining equal.
This formula only deals with productive capital, there is also commodity capital – the commodities that the capitalists have produced but have not yet sold – & money capital – capital in the form of money. Therefore, the rate of profit on total capital will be lower.

Countertendencies
The rise in the productivity of labour tends to lead to a rise in the rate of surplus value (the rate of exploitation) that counteracts the fall in the rate of profit.
Also, as the productivity of labour rises, the commodities that make up constant capital fall in value, which lowers the value of C.
New developments that increase T, such as improved transportation, e.g. Panama Canal, counteract the tendency of the rate of profit to fall.
Functional (moral) depreciation – the invention of new machines & technologies that can produce at a lower price due to increased labour productivity, lower the value of existing constant capital.

Changes in the composition of capital due to changes in the rate of surplus value are to be distinguished from changes in the value of constant capital. The latter being defined as changes in the organic composition of capital.

A rise in energy prices will represent a considerable rise in the organic composition of capital & lower profit rates.
The depletion of raw materials works in the direction of increasing the value of constant capital & lowering profit rates.

The fall in the rate of profit manifests itself over very long time periods & should not be confused with the business cycle.

The importance to capitalists of ‘smashing the unions’ & outsourcing to cheaper labour to maintain profitability.

Concretely, most, if not all, capitalist crises since 1825 have tended to begin in the consumer goods sector, especially residential construction. Other durable goods industries, such as the car, tend to turn down before the rest of the economy does. Recoveries also tend to begin in these industries.

The importance of understanding the division of surplus value between profit & interest in crisis theory.

To the industrial capitalists it is not the rate of profit in terms of values that matters, rather the rate of profit in terms of money.
The process by which prices are ultimately brought into line with values is a complex one & provides opportunities for crises.

SW: The main cause of the current crisis…is that whilst the industrial capitalists have been squeezing much more surplus value out of the working class than ever before, they have stumbled upon the problem of finding enough paying customers to actually realise the value & surplus value embodied in the greatly increased mass of commodities they have been producing.

Marx argued that prices tend to equal values only by constantly not equalling them